Citi put the Paulson hedge funds on a watch list earlier in 2012.
Armel Leslie, a spokesman for Paulson & Co, declined to comment on the withdrawal.
Citi announced the decision to pull capital from Paulson's Advantage funds, which have been struggling to produce gains so far this year, on conference call on Thursday morning, according to the source.
Paulson's Advantage Plus fund, the more leveraged version of the Advantage fund, lost roughly 50 percent in 2011 and has extended its poor performance so far this year.
(Reporting By Katya Wachtel)